As the financial crisis affects the real estate sector in the region, Qatar is feeling the impact as well. Since the last quarter of 2008, sales have dropped considerably, the price of land and property has fallen and so have rents.
“There is an 80 percent decrease in the volume of sales,” says David Oayda, general manager at Asteco Qatar. Property prices have not decreased to the same extent, since most developers and landlords are adopting a wait-and-see approach — not selling or buying until the economic situation stabilizes and lending comes back.
Property prices have decreased by 30 percent, according to real estate services firm Jones Lang LaSalle, while others consider the plunge more severe. Land prices have been impacted as well with a decrease of around 50 percent in the suburbs and 30 percent in the capital Doha. Rents are witnessing a large decrease with new units available, and demand slowing due to fewer people entering the country.
As demand slows and prices adjust, Qatar is experiencing a healthy and necessary correction, which Seraj Al Baker, general manager of Mazaya Qatar Real Estate Development, says was inevitable.
“People know that prices increased more than enough. [the market] needed to correct itself, and the international crisis came as an excuse,” he says.
Rents roll back
The increased influx of expatriates in the last few years has caused a rapid increase in Qatar’s population. Expatriates currently account for around 78 percent of the country’s 800,000 residents. The supply of new units was not growing accordingly, which put pressure on housing rentals. Between 2005 and 2007, Qatar’s planning council recorded a whopping 154 percent increase in rents.
To control skyrocketing prices and near-record inflation of 14 percent in 2007, Qatar’s cabinet implemented a 2-year rent freeze in March 2008. This kept rents from increasing further as new supply came online. But with the financial crisis decreasing demand, and new units coming to their handover stage, the cap is no longer needed. Rents of both offices and apartments are softening, depending on the area.
According to Colliers International’s second quarter report, apartment rental rates at the higher end of the market have decreased by around 15 percent. Oayda thinks that in general, the drop in rental prices is around 15-25 percent, depending on the areas.
Office supply in Doha is also growing, especially in the West Bay. The absorption rate of the new offices has been slow, mainly due to the decrease in the number of new businesses being established in Qatar. According to Colliers, rental demand for new office space in prime West Bay has softened by 10 to 15 percent in the last four months. Asteco’s Oayda thinks it has decreased by around 20 percent. The demand for cheaper office space along the C Ring Road and other areas remains high, keeping rents stable.
Landlords are also becoming more flexible with rental contracts by renewing leases annually, offering tenants the ability to move to new office space or apartments after a short period of time. Property owners are also trying to attract tenants, or keep existing ones, by offering new payment schemes allowing them to make multiple payments throughout the year.
With new supply coming online, especially in the Pearl Qatar real estate project, rents are expected to decrease further, as many people will relocate, benefitting from competitive prices and better quality developments. Colliers estimates that 9,000 new apartments will be coming onto the market by the end of 2010.
The decrease in sales volume will also encourage developers to shift their strategy and offer units for lease rather than selling them at lower prices. This increases the supply side of the market and eases rents as well.
* Numbers obtained through survey of 200 of the region’s leading real estate investors
Prices feel the push
Sales of residential properties have been somewhat frozen, especially in the off-plan and the primary markets where buyers are reluctant to purchase homes because of the lack of financing and expected price decreases. Prices have decreased, much less than the more damaged markets like Dubai, for many reasons.
First, the supply shortage has given developers the luxury of not having to decrease their prices substantially since they have already sold most of their units. “They have sold enough,” says Oayda. “Developers have to do one of two things; either reduce their prices or hold their properties and possibly lease them at delivery.”
Another reason why property prices have not plummeted is that the small Qatari market is less speculative, which keeps the affect of distressed sales minimal. As is the case around the region, many speculators exited the Qatari market because of falling prices.
“If you bought yesterday and you want to sell tomorrow, it is very bad news for you,” says Al Baker. He adds that speculators do have a role to play in a booming market, but too much speculation becomes harmful. “Speculators are like the spices. You put a little bit. It is not the meal, but you need it there,” says Al Baker.
Even though most developers are reluctant to lower prices, some are feeling the pressure since new supply is coming online and there are fewer takers in the market.
In the suburbs prices were especially hard hit because owners outside the city excessively inflated prices, thinking that after the boom in Doha, the demand would shift to the suburbs.
“Land owners were asking for 150 or 200 QR ($41 to $54) per square meter [outside Doha] which was crazy,” says Al Baker. Land always decreases faster in value than built up property, mainly because it is non-income generating and leveraged owners sell it rather quickly.
A survey by Aswaq.net of Al Arabiya Television states that prices decreased more than other estimates. Using prices supplied by a number of real estate brokers, the survey says prices of real estate in Qatar are down 40 to 70 percent since September 2008. Oayda says that’s not realistic. He says he “couldn’t possibly agree” with Aswaq’s analysis.
As rents are expected to decrease with new units coming online, the same is expected of sales. Pearl Qatar is one example. The multibillion dollar man-made island project will eventually house 41,000 people. At the beginning of May, the development’s first units were handed over to their owners. Analysts say as more Pearl Qatar units are put up for sale, rents and prices are expected to decline further.
A flight to quality
As the flood of expatriates into Qatar happened rather quickly and over a short period of time, finding good quality apartments became a problem. As units came online they were almost immediately occupied, which drove up rents. The low competition made developers less keen on delivering high-quality products.
“In the last couple of years, products that came to the market were terrible,” says Al Baker. Now with the market correction and a surge of new units, experts believe that quality will improve. The financial crisis is also creating more competition in the market and encouraging developers and landlords to improve quality to attract more buyers.
Asteco’s first quarter report suggests there will be a ‘flight to quality.’ Consequently, as better developments come onto the market in the next few months, lower quality developments will be hurt most.
Liquidity flows in and out again
In the last few years, the share of real estate sector credit as a percentage of total banking sector credit has increased considerably, rising from 4.3 percent in 2003 to more than 13 percent in the first six months of 2008, according to a Global Investment House report.
Even though the banking sector in oil and gas rich Qatar has not been severely affected, loans and mortgages have become hard to obtain. Banks have adopted tighter lending policies, making fewer applicants eligible for loans, and consequently decreasing demand in the real estate market as buyers become more scarce.
Many projects have been put on hold as developers are having trouble obtaining financing for their projects, according to a real estate executive who asked not be named.
“Some banks stopped lending even if [the developer] started building already,” the executive says. At the moment, credit is becoming easier to obtain.
“Lending is a problem, but we are seeing a reverse” says Al Baker. But the share of credit for real estate growth is expected to decelerate, since banks will still adopt a more conservative lending policy in the uncertain market situation.
Companies in the real estate market
This year will be one of the most challenging for real estate companies as they deal with a lack of financing, investors’ decreasing confidence and the cooling property market. After companies watched their stock value plunge since mid-2008, it seems values are beginning to rebound. For example, the price of Barwa Real Estate Company stock rose by some 58 percent in the last 3 months. Ezdan Real Estate Company stock also rose by 69 percent in the same period.
Even though the financial situation of the Qatari companies is considered better than their counterparts in Dubai, there are signs of consolidation in the market. There may be big mergers on the horizon.
“It is a good time to do it” says Oayda. “It is a cost-saving exercise, working as a stronger team.”
In January, the government ordered a merger between Barwa Real Estate and Qatar Real Estate Investments Company (Alaqaria). The companies appointed financial advisors in order to meet the requirements for the merger, which is supposed to take place by the end of the year. Ezdan Real Estate Company also said in March that it is considering a merger with the Group of International Housing Company.
“Some are listed and haven’t really explored or touched upon the issue of the value of shareholders in some of these mergers,” says a market analyst concerned about the fact that shareholders’ interests do not seem to be the main driver behind the merger. The analyst addes that it is unknown “at what sort of ratio does the merger occur, and what sort of effect does it have on the shareholders.” The analyst asked not to be named because he is not authorized to speak to the media.
A delayed IPO
In August last year, Mazaya Qatar announced plans to raise $137 million in an initial public offering (IPO). The company’s license, which was issued in March 2008, dictates that the IPO has to be launched within two years. The exact date of the IPO was not declared, but since the announcement was made, the move is still on hold.
“Because the crisis took place, it was wise to postpone” says Al Baker. However, it is not the company who decides when to go public, but the Qatar Financial Centre Authority (QFCA), which is responsible for regulating the market. Mazaya Qatar was in queue after Vodafone. With the Vodafone IPO taking place in April — one of the largest IPOs in Qatar — it is Mazaya’s turn next.
Even though the final decision lays with Qatar’s financial authority, Mazaya would not launch the IPO blindly according to the authority’s decision. Both would collaborate in order to identify the appropriate time for the company to go public.
“It is true that we [only] have two years, but it is not the appropriate time,” says Al Baker. “The issue will be addressed when the market is appropriate.”
Government support
What triggered the massive growth in the Qatari real estate sector in the first place was large government expenditure made possible by high oil and gas prices. Even though prices have decreased, Qatar is still expecting huge revenues because of the increased exports of liquefied natural gas (LNG), of which Qatar is the world’s largest exporter. In April, the government approved a budget of $25 billion for the fiscal year 2009-2010, slightly lower than last year’s budget, but still considered healthy under current conditions.
“The budget illustrates Qatar’s keenness to achieve the targets set in the 2030 National Vision to support economic and social development,” said Qatari Economy and Finance Minister Yousuf Kama, according to the Qatar New Agency.
The plan aims to sustainably transform Qatar based on the pillars of social, economic, environmental and human development. It calls for huge government investments, with the construction sector expected to grow 17 percent in 2009, according to the organizers of Qatar International Real Estate and Investment Exhibition 2009. This is expected to encourage significant private sector investment in the Qatari real estate market.
The government is also undertaking other initiatives to support all sectors of the economy. For example, the Qatar Investment Authority (QIA) revealed plans to acquire 10 to 20 percent ownership in each of the local banks. At the end of March, the government also acquired $1.8 billion dollars worth of local banks’ investment portfolios. In late April, it announced plans to pump cash into companies outside the banking sector.
Upbeat expectations
Despite the massive investment the government is making in infrastructure and development, the market still represents a small pool of investment. The price and rent adjustments have come at a time when the Qatari market is still in the first stages of its development, and when the role of speculation in the country is minimal, keeping it safe from the panic selling that has crippled Dubai’s market.
“I think we are at the bottom of the market,” says Oayda. He adds that prices will not decline anymore, but will rather stabilize. “I think that by the end of this quarter (the second quarter) the sentiment will change, the confidence will get stronger,” Oayda says.
On the other hand, Al Baker is uncertain about the short term.
“I am not sure if we hit the bottom or not, there might be… room for the market to go down,” he says.
As for the long term, Qatar seems to be a promising market, with the clear sense of direction in its development through the Qatar 2030 National Vision, and the backing of a deep-pocketed government to help sustain and increase the country’s growth. Consequently, Doha is expected to still emerge as an attractive destination for expatriates to work, live, and invest, which will contribute to the sustainability of the real estate market.
